While diversification offers a prudent strategy while investing in mutual funds in India, managing many funds in one’s portfolio may not always be the optimal approach. Investing in many funds leads to over-diversification, makes monitoring difficult, increases costs and may hamper overall returns over the long run. Therefore, it is important for investors to consciously reduce the number of funds in their portfolio by following some basic principles of fund consolidation. This article explores why and how you should consider reducing the funds in your mutual fund portfolio.
Why you should not invest in a lot of mutual funds
Diversification is an important principle of investing. It helps reduce the overall risk of your portfolio. At the same time, excessive diversification could undermine its benefits. Maintaining too many mutual funds in a portfolio can lead to issues like increased complexity, higher monitoring needs, and greater transaction costs. Additionally, over-diversifying may not necessarily translate to superior returns. Managing a portfolio with many funds could also be time-intensive and fail to align with one’s financial objectives.
How can you reduce the number of funds in the portfolio?
Check portfolio overlaps
Begin by evaluating the holdings of each mutual fund in your portfolio. Overlapping investments across multiple funds may inadvertently concentrate your risks rather than diversify them. Tools provided by online investment platforms in India can assist you in analysing these overlaps. This helps you streamline your portfolio and achieve better diversification.
Don’t over-invest in sectoral and thematic funds
While sectoral and thematic funds may promise high returns during specific market trends, they may often come with increased volatility. For long-term mutual funds, it’s advisable to not to focus too much on these funds. Instead, also focus on diversified equity and debt funds that provide stability and consistent growth. This offers simplicity in portfolio management.
Avoid underperforming funds
Regularly review the performance of your funds using online tools and resources. Identify funds that consistently underperform their benchmarks or peers. While short-term fluctuations are normal, persistent underperformance can be a red flag. Redeem underperforming funds and reallocate the funds to more robust options. This approach ensures that your portfolio remains aligned with your financial goals.
Realign your funds with your goals
Your investment goals play a pivotal role in determining the composition of your portfolio. If you have specific objectives, such as tax saving or wealth accumulation, choose funds that align with these goals. For tax saving options, consider Equity-Linked Savings Schemes (ELSS), which offer both tax benefits and the potential for capital appreciation.
To wrap up
A strategically diversified portfolio is integral to long-term investment success in Indian mutual fund market. But over-diversification could prove counterproductive. By streamlining your portfolio periodically and retaining only those funds that align with your objectives, you can optimize returns while enjoying simplicity in portfolio management. The key is to strike the right balance between diversification and consolidation based on your individual needs and risk appetite.
